Manufacture This

The blog of the Alliance for American Manufacturing

Chinese state-owned enterprise's entry into the U.S. rail market is a concern, security study finds.

Concern is growing about increased Chinese investment in the American economy.

So much so that the Trump administration has recently stepped up oversight into transactions that might affect national security. After Congress signed off on this expansion, the New York Times earlier this month reported “the administration signaled that it would apply its new authority very broadly and would review any foreign transaction involving a business that designs or produces technology related to 27 industries, including telecom, semiconductors and computers.”

Into this climate comes a new report from Brig. Gen. John Adams, U.S. Army (Ret.), on the security threats facing the American freight rail network. (You remember Gen. Adams -- he prepared for the Alliance for American Manufacturing a 2013 study of military supply chain vulnerabilities.) 

To illustrate the threats facing rail, Adams’ report focuses on China’s national rail company, its recent entry in the American rail market, and its tie-in to the much-discussed Chinese industrial policy – Made in China 2025, which identifies rail as a critical manufacturing sector to dominate.

From the report:

China’s government has brought to bear a range of state subsidies, state financing, and other resources to support the market entry and market ascension objectives of its wholly government-owned, $33 billion conglomerate, China Railway and Rolling Stock Corporation (CRRC), an enterprise that – with more than 183,000 workers – is now the largest rolling stock producer in the world. While it is owned by the Chinese government, CRRC is controlled by the Communist Party of China, and it has set about to build a foothold in the U.S. market, with a near-term goal of overtaking our rail sector.

The CRRC is currently in pursuit of contracts “to sell transit cars to transit agencies in Boston, Chicago, New York, Los Angeles, and Philadelphia, among others,” the report notes. “The Chinese government is banking on the fact that once CRRC secures sufficient U.S. municipal transit contracts, it can pivot quickly and inexpensively toward the more strategically important freight rail sector.”

Now look: There’s nothing inherently wrong with offering low prices on rail cars to a cash-strapped American transit system. But there’s something concerning about a state-owned enterprise banking on that financial distress to gain a foothold in an important American infrastructure market.  

In fact, calling domestic freight rail “important” is kind of an understatement. The privately owned freight rail network, with approximately 140,000 miles of track, alone counts for 40 percent of freight moved by ton-miles in the United States. What’s more, the report observes that freight rail is a regular conduit of military equipment and potentially toxic and hazardous commodities. Quietly, freight rail is a remarkably important piece of our infrastructure – and relatively ungoverned by national security concerns.

Adams’ report suggests three fixes to address security concerns:

1) Develop comprehensive restrictions and additional reviews on investments from foreign state-backed entities in critical infrastructure integral to our national defense.

2) Ensure that appropriate federal agencies, in coordination with states and localities, develop robust standards for cyber and data integrity applicable to any rail or transit sector contracts involving foreign state-backed entities.

3) Strengthen oversight of Buy America laws to ensure that existing laws and regulations are adhered to in federally-funded transit and rail procurements including railcar manufacturing and explore new avenues to further protect the manufacturing capabilities of freight rail and other core domestic industries that are integral to support and maintain our defense industrial base.

It’s a lot to think over. Read the whole report here.